Tim Geithner’s plan to fix the toxic asset problem relies on the participation of the private sector. Unfortunately for the plan, the private sector has been learning over the past weeks that it is dangerous to go into business with the government. Promises that were made at the time were quickly discarded, but no one can hold the government to its promises. Even promises that were enshrined in legislation are in the process of being revoked.
In today’s political climate, you would be crazy to enter a partnership with the government if you have any other choice. Some firms may have no other choice, but Geithner’s plan relies on participation from solvent firms. Those firms can afford to decline, and some, such as the Bridgewater hedge fund, are deciding to do just that.
Bridgewater’s manager, Ray Dalio, wrote to his investors:
Then there is the issue about the political risk, which we are more concerned about because there will be such a limited number of managers being allowed to participate in this program that it raises possibilities (or at least perceived possibilities) of them colluding because they all know each other. Either these investments will make a lot of money for their investors or the government will lose a lot of money — in either case, there will be reasons for politicians to complain and to focus on the five winners to see how they “abused” the system.
Dalio nails it here. If the plan results in a profit, participants will make a lot of money. They will be vilified for it, and perhaps face a 90% tax on their profits. If the plan results in a loss, the government will lose a lot of money. The participants will be vilified even more, and perhaps be charged with some trumped-up crime. Either way, the small number of participants will set up charges of collusion, which will be key to the ensuing vilification and/or prosecution. Dalio says to hell with it, he’s not going to play.
What we have here is a consequence of the congressional/presidential tantrum over the last few weeks. There’s always political risk, but the behavior of our leadership has ratcheted it to extreme levels. Quite simply, the government has shown that it cannot be trusted to abide by any agreement it makes right now, even if it’s written into law. Geithner’s plan had a lot stacked against it already, and this could be the final blow.
UPDATE: The Economist’s story on the Geithner plan also sees political risk as a problem:
This time, too, the sweet terms have piqued the interest of big fund managers, such as BlackRock and PIMCO. The biggest obstacle to their participation is no longer financial risk but the political sort, thanks to the bonus frenzy over American International Group (AIG). The Obama administration may have toned down its Wall Street-bashing, and Congress is rethinking its plan to tax bonuses at up to 90%. But many still worry that they could become a target if they reap big windfalls.
Gee, why would they worry about that?
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